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June 10, 2013

PIMCO’s Gross: Fed in a Corner, Will ‘Taper’ by Year’s End

It’s hard to have a market for Treasuries when the Fed owns them all

PIMCO chief Bill Gross noted the squawks from the more hawkish members of the Fed to begin exiting the now three-year-old QE program. Fed Chairman Ben Bernanke and Vice Chairwoman Janet Yellen, however, are advocating its continuation until the national unemployment rate hits 6.5%.

“It is a conundrum,” Gross told The Daily Ticker on Monday. “He’s in a corner as are all central banks. We have sympathy.”

The website notes “sympathy” for Bernanke does not equal support; Gross has been critical of the Fed’s QE program. He writes in his latest investment outlook:

“Our global financial system at the zero-bound is beginning to resemble a leukemia patient with New Age chemotherapy, desperately attempting to cure an economy that requires structural as opposed to monetary solutions. Their near-zero-based interest rates and QEs that have lowered carry and risk premiums have stabilized real economies, but not returned them to old normal growth rates. Perhaps, in addition to a fiscally confused Washington, [the Fed’s] policies that may be now part of the problem rather than the solution.”

Bernanke’s “out,” it would seem, is to begin tapering, a term that, like “sequester” and “fiscal cliff,” will soon enter the general economic lexicon.

“Be prepared to hear the word ‘taper,’ which is all about how far and how fast the Fed will eventually unwind all the liquidity and roll back the bond buying,” T. Rowe Price Equity Series investment board member Stephon Jackson said recently.

Gross notes that the Fed’s leadership may be weary of turning off the QE spigots too soon, but that Bernanke has also “exacerbated” the negative consequences of monetary policy.

“It’s hard to get out once you get in the quicksand,” he quipped to the Ticker.

As a result, he thinks the Fed will have to taper its bond purchases by the end of the year. Lower deficits in Washington mean the Treasury will issue less debt, he said, which could create a shortage of Treasury securities if the Fed continues QE at its current pace.

“It creates a problem … if the Fed owns all the Treasuries,” Gross said. “Then there is no market for the bonds. So I think at some point they’d taper if only to permit the rest of us to have a few.”